A job loss, an illness or an unexpected expense are not things we typically like to think about. Having a plan in place can help reduce your anxiety and protect you financially when the unexpected happens.
In these times of increased uncertainty, there has never been a better time to make sure you are prepared for unexpected financial costs. Setting up a rainy day fund, budgeting for home repairs and maintaining appropriate types of insurance are all steps you can take to insulate yourself from financial surprises.
Rainy Day Fund: Most of us never expect to lose our job, but in the current environment this has become a reality for millions of people. Set up a rainy day fund with 3-9 months of savings in order to cover living expenses. If you don’t have enough savings now, allocate an affordable portion of your monthly earnings to build up your fund. Make sure your rainy day fund is in a highly liquid investment (high interest savings or money market account) and separate from your retirement and investment accounts.
Home Repairs: While home ownership may be rewarding, it can also come with costly surprises. Unfortunately, when the unexpected happens costs are typically in the thousands, if not tens of thousands. Experts recommend setting aside 1-3% of your home’s value on an annual basis in order to have a fund ready for routine and unexpected maintenance. In addition, regardless of your personal financial situation you should maintain an appropriate amount of homeowners or renters insurance.
Health Expenses: If health insurance isn’t readily available through your employer, it can be tempting to ignore this added expense. The reality is that one major health issue could be financially devastating. There are numerous private plans available in the health insurance marketplace. Many individual states now also offer exchanges to facilitate the purchase of affordable health insurance.
Disability: A prolonged illness or disability can result in significant lost wages if you are unable to return to work. Short-term and long-term disability insurance can provide a safety net to replace lost wages in the event you have a serious illness. Many employers offer disability insurance as part of their benefits package. If not, there are ample private options available.
Maintain Credit Availability: Even with the best planning, we can still find ourselves in an emergency situation where we need quick access to funds. Having credit available provides a vital backstop if no cash options are readily available. Just remember to pay down this debt as quickly as possible once you get back on your feet financially.